Stock market surges on fiscal deal

Global stocks kicked off the 2013 trading year with a strong start Wednesday, as investors welcomed a deal between President Obama and congressional Republicans that ended, at least temporarily, an impasse over fiscal policy that had threatened chaos in the new year.

The deadline drama over the so-called fiscal cliff ended when a sufficient number of Republicans in the House of Representatives joined Democrats to back a deal the Senate had reached earlier, modestly raising income taxes on the highest-earning Americans, ending payroll tax cuts, and creating permanent tax cuts for others.

“There’s clearly a big relief rally,” said Christian Schulz, an economist in London with Berenberg Bank.

The Euro Stoxx 50 index of euro zone blue chips rose 2.6 percent in afternoon trading, while the FTSE 100 index in London gained 2.3 percent. The euro gained 0.6 percent to $1.3270, and yields fell on Spanish and Italian government bonds.

Asian indexes also gained, with the Hang Seng index in Hong Kong rising 2.9 percent. But markets in Japan and mainland China were closed for holidays.

Still, analysts warned that the gains might not last, as the last-minute deal had only bought time.

The deal “is likely to prove only a temporary fix to address fiscal uncertainty in the U.S.,” Lee Hardman, an analyst at Bank of Tokyo-Mitsubishi UFJ in London, wrote in a research note, pointing out that “the planned sequester government spending cuts merely delayed for two months.”

Investors, he added, probably will begin to focus on “whether U.S. politicians will be able to raise the debt ceiling in the next two months to avert a technical default, and whether the delayed sequester spending cuts will now come into force on March 1.”

Mr. Schultz noted that the United States hit the debt ceiling of $16.4 trillion, or 104 percent of 2012 gross domestic product, on Dec. 31, and could it exceed it as soon as February without congressional action.

There are also questions about how America’s new commitment to cutting the deficit will affect the economy and its credit ratings.

“The austerity they’ve imposed is very modest,” Mr. Schultz said, “perhaps 1 percent of G.D.P. So maybe the most interesting thing will be to see how the ratings agencies react.”

Analysts at DBS in Singapore wrote in a research note: “Call it breathing room, call it kicking the can down the road, call it whatever you like — come mid-February, when the decision on the legal U.S. debt limit will be needed, the fight starts afresh.”

They added, “Two more months of shenanigans and waffling/seasick markets? It certainly looks that way.”

The stock market gains in Europe came despite indications that the region’s manufacturing activity remains in the doldrums. Surveys of purchasing managers by Markit Economics showed euro zone factories ended 2012 in poor shape, with both production and new orders declining in December. German factories posted declines in both output and new orders, according to the Markit data, while the Spanish manufacturing shrank a 20th consecutive month, with both the decline and the pace of job cuts accelerating.